Fitch Ratings has affirmed
Fitch has also assigned a 'BBB' rating to Darden's
The 'BBB' rating reflects Darden's sizable revenue base of roughly
Key Rating Drivers
Key Drivers Stable Recent Performance: Darden's revenue in fiscal 2023 (ended
In fiscal 2024, Fitch projects revenue increasing around 10% driven by organic growth of around 5% and by the acquisition of Ruth's of about 5%. Fitch projects gross margin could improve moderately as the company experiences deflation in categories such as chicken, seafood and dairy helping offset inflation in beef, wheat and other categories. Additionally, Fitch expects labor inflation could be managed by improving productivity. Fitch expects EBITDA margin to be around relatively flat in fiscal 2024 with EBITDA of
Casual Dining Segment Facing Secular Challenges: Modest overall growth across the sector highlights challenges the casual dining segment has faced over the past decade, including share losses stemming from the rapid growth of the fast-casual segment of the restaurant market, given the perceived convenience, value and quality of the offering.
Additionally, the full-service restaurant store base has grown in the low-single digits since 2010, contributing to an oversaturation in the market. Fitch expects that Darden's scale, expertise and resources will allow it to continue to invest in areas such as menu innovation, cost savings, technology and customer experience that will continue to drive market share gains as smaller peers are less equipped to manage these challenges.
Bolt-on Fine Dining Acquisition: Darden recently completed the acquisition of Ruth's Chris steakhouse in
Darden expects to realize net run-rate synergies of about
SRS Recovers Despite Weak Traffic: Darden's same-restaurant sales (SRS) continue to outperform that of its peers, enabling the company to benefit from economies of scale and improve profitability. According to the company, SRS growth at
While Darden's sales have recovered from depressed levels during the pandemic, traffic on a year-over- year basis has softened. Weaker traffic, however, has been offset by strong ticket which has benefited from price increases and reduced discounting. Fitch expects SRS sales in fiscal 2024 to be at the lower end of the company's guidance of 2.5%- 3% given Fitch's view around discretionary consumer spending which could pressure industry sales. Beyond fiscal 2024, SRS growth is expected to be around 1% - 1.5% range.
Moderate Leverage: Following the acquisition of Ruth's steakhouse in
Strong FCF: FCF has averaged over
Derivation Summary
Darden's 'BBB' rating reflects it sizable revenue base of roughly
Similarly rated peers in the retail and consumer products industries include Sysco,
Campbell's 'BBB'/Rating Watch Negative (RWN) ratings reflect its strong brands, significant market share in several product categories, solid profit margins and consistent FCF generation. Fitch expects EBITDA leverage to be in the mid-2x in fiscal 2023 (ended July). Fitch expects organic sales to be flat to modestly positive over the medium with EBITDA sustained at around
Bacardi's 'BBB-/Stable' ratings reflect a strong competitive position supported by good diversification in more than 160 markets worldwide and healthy profitability with leading premium and super-premium brands that have strong market share across several spirit categories. The acquisition of Patron enhanced Bacardi's portfolio and materially increased exposure to the super-premium plus Tequila category, which is one of the fastest growing spirits categories in the
Sysco's 'BBB'/Stable rating reflects the company's large scale, good market position, and diverse customer base with broad geographical distribution of an extensive line of food and non-food items including Sysco-branded products with an estimated 17% share of the
Key Assumptions
Revenues are expected to increase by 10% in fiscal 2024 to around
Fitch expects EBITDA to improve modestly in fiscal 2024 and EBITDA margins roughly flat in fiscal 2024 as commodity inflation eases;
FCF after dividends of around
EBITDAR leverage to be around 2.5x barring material debt financed acquisitions;
The majority of Darden's capital structure has fixed rate debt with no maturities until 2027. The company has exposure to variable rates through the CP program. As of Aug, 27, 2023,
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A public commitment to maintain lease-adjusted leverage at the low end of the company's 2.0x to 2.5x target (based on capitalizing rent expense at 6x minimum rents) which roughly equates to Fitch's EBITDAR leverage calculation of 2.5x to 3x such that EBITDAR leverage is sustained below 2.5x;
Continued market share gains with positive SRS and positive traffic performance.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A change in financial strategy such that EBITDAR leverage is sustained above 3.0x due to significantly higher debt;
Persistent SRS and operating earnings decline or market share loss, particularly at
Liquidity and Debt Structure
Solid Liquidity: As of
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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